EPAct 179D Experts

"The least expensive kilowatt, is the one not used."

- Jacob Goldman

The Tax Aspects of PVH and Warnaco's Corporate Environmental Policy

Founded in the 19th century, Phillips-Van Heusen Corporation (PVH) is a
global company with revenues of over $5.5 billion . Amongst the world’s
largest apparel corporation, PVH owns internationally recognized brands such as
Calvin Klein, Tommy Hilfiger, and Van Heusen. PVH is in the process of
acquiring Warnaco Group, Inc., a Delaware corporation that owns brands such as
Speedo, Chaps, Warner’s, and Olga.

After this recently announced acquisition, PVH-Warnaco will become an $8
billion sales company. Aware of the impacts of its global activities and based
on the acknowledgement of earth’s limited natural resources, PVH has
developed a series of environmental commitments with the objective of
incorporating sustainability into all aspects of its operations. Similar to
other major companies, such as Walmart , PepsiCo , Baxter International ,
Procter & Gamble , and Target , PVH has designed a comprehensive
environmental policy that focuses on three main areas: facilities,
products/packaging, and supply chain.

This article will discuss how EPAct tax deductions can play a significant
role in carbon footprint minimization and supply chain sustainability aspects
of PVH’s program.

EPAct Tax Deductions

Pursuant to Code Sec. 179D, as enacted by the Energy Policy Act of 2005
(EPAct) , properties that make qualifying energy-reducing investments in new or
existing locations can obtain immediate tax deductions of up to $1.80 per
square foot.

If the building project does not qualify for the maximum EPAct $1.80 per
square foot immediate tax deduction, there are tax deductions of up to $0.60
per square foot for each of the three major building subsystems: lighting, HVAC
(heating, ventilating, and air conditioning), and the building envelope. The
building envelope comprises of every item on the building's exterior perimeter
that touches the outside world including roof, walls, insulation, doors,
windows, and foundation.

Tax Credits

Pursuant to the Internal Revenue Code Sec. 48, companies or individuals
installing various qualifying alternative energy technology can use a variety
of 10% and 30% alternative energy tax credits.

Exhibit 1:

Minimizing PVH’s Carbon Footprint

PVH understands that the goal of reducing the environmental impact of its
operations is intrinsically related to minimizing its greenhouse gas emissions.
To this end, the company has developed programs to monitor and decrease its
energy consumption. Exhibit 2, originally featured in the 2011 PVH Corporate
Social Responsibility Report , presents PVH’s emission sources.

According to the same report, in 2011, PVH’s U.S. facilities have
consumed 146,922,705 kWh. Building Energy was responsible for virtually the
totality (95%) of the company’s carbon footprint, particularly retail and
office locations, which present the highest emissions per square foot (see
Exhibit 3).

Exhibit 2:

Exhibit 3 :

According to the company’s Corporate Responsibility Website , energy
efficiency measures are underway to minimize the carbon footprint of its
facilities. In 2011, PVH initiated a series of lighting retrofit projects
(installation of LED and motion sensors) and implemented energy scans to assist
in its decision to replace HVAC units. Such projects are likely to qualify for
EPAct tax savings (see Exhibit 1), meaning that PVH investment costs to achieve
its sustainability goals can be significantly reduced. Moreover, the company
has started implementing renewable energy projects, which can also qualify for
tax incentives.

Promoting Supply Chain Sustainability

PVH’s approach to sustainability is based on the notion of variable
influence and impact. Especially with regards to the supply chain, the company
acknowledges that although operations are not under its direct control, their
impact on the environment is undeniable and cannot be disregarded. That is why
PVH is mobilizing its efforts to reinforce its influence over its supply chain,
particularly through the implementation of environmental management systems,
the elimination of restricted substances and the improvement of material and
energy efficiency. To this end, the company has developed two environmental
assessment tools: (1) the environmental profile tool and (2) the water, energy,
and carbon footprint tool.

Launched in September 2011, the water, energy, and carbon footprint tool was
initially applied to 64% of PVH’s internal supply chain, excluding Tommy
Hilfiger . It encompasses five different objectives, as presented below:

PVH as a Sustainable Supplier

While PVH requires sustainable practices from its suppliers, it must respond
to demands from its consumers. A considerable amount of the company’s
revenues come from retailers and wholesale buyers, such as Macy’s,
Walmart, JCPenney, and Kohl's, which have their own supplier sustainability
programs. In 2010, sales to its five largest clients accounted for more than
20% of PVH’s revenue . As a Walmart business partner, PVH is required to
respond to 15 Sustainability Supplier Assessment Questions, concerning energy
and climate, materials efficiency, nature and resources, and people and
community . Similarly, Kohl’s evaluates its suppliers using the Higg
Index, a “common, industry-wide tool for measuring the environmental and
social performance of apparel products and the supply chains that produce
them” , developed by the Sustainable Apparel Coalition. According to the
retailers’ website, this tool was first implemented in 2011 and is
expected to drive major sustainability improvements through its supply
chain.

PVH’s supply chain position is a good example of how companies, by
establishing sustainability goals, have the power of triggering similar
behaviors from its immediate suppliers, spreading sustainable practices through
the lowest tiers of the supply chain.

Conclusion

PVH’s Corporate Environmental Policy simultaneously responds to its
clients’ sustainability standards and raises new requirements to its own
business partners. The environmental commitments stated are going to drive
important improvements not only on PVH’s facilities but throughout its
supply chain. The ongoing acquisition of the Warnaco Group, Inc. is bound to
intensify this phenomenon. A variety of energy-related Code Sec. 179D and
alternative energy tax credits are available to support these measures.